Colorado Springs company survives challenges to become worth nearly $1B

Caption +Renee Dicks works on stranding laser catheters which may be used to vaporize arterial blockages or assist with removing the flexible cord that connects a pacemaker to the heart, known as a lead, at Spectranetics Monday, June 2, 2014. Spectranetics is celebrating it's 30th anniversary after experiencing hardships such as the founders' deaths and struggles over control of the company. Photo by Julia Moss, The Gazette

A few years after he founded Spectranetics Corp. in 1984, the late Robert Golobic told an employee he was afraid that the company's medical laser was only "so-so" and would make it difficult for the fledging firm to attract investment.

The employee, Kenny Grace, responded that the product - a new type of laser that was precise enough to cut the material off the head of a match without igniting it - was ahead of its time.

How right Grace was. Spectranetics not only attracted venture capital and sold stock to the public, it survived the death of both its founders, overcame a bitter fight for control of the company, a federal investigation that resulted in fines and criminal charges against three executives.

Today, the Colorado Springs company is worth nearly $1 billion - and has several opportunities up its sleeve that could improve its fortunes more.

"Our success is a story of perseverance," Chief Financial Officer Guy Childs said.

A rocky start

Golobic was an electrical engineering instructor at the University of Colorado at Colorado Springs and had spent years researching the use of high-energy lasers in weapons at the Air Force Academy.

When he started Spectranetics with a former student, it wasn't with medical devices in mind. He was trying to develop laser systems to transfer semiconductor circuit designs onto silicon more quickly and inexpensively.

Unable to put together a research team or land financing, Golobic went in a different direction. His neighbor, Norwegian-born engineer Johan Sverdrup, had conducted groundbreaking research on ultrasound and Doppler imaging to generate video images of organs. Together, they drew up a new business plan to focus on medical lasers and raised $320,000 from friends and associates.

In early 1986, the company bought its first laser from the University of Pennsylvania chemistry department for $7,000 and repackaged it into its first system, which was designed to clear clogged arteries near the heart with a blast of ultraviolet light.

Things got off to a rocky start. That same year, the company was hours away from hosting its first demonstration in front of a group of potential investors - executives from Minneapolis-based Medtronic Inc. There was just one problem: The laser didn't work.

Employees were frantic by the time Sverdrup left to pick up the executives at the airport. But they scrambled to fix the problem, and as Sverdrup and the Medtronic group pulled into Spectranetics' parking lot, the laser emitted a pulse for the first time. That demonstration landed Spectranetics its first institutional investment in early 1987.

About that same time, Grace left a good-paying job to become Spectranetics' second full-time employee, and he was tasked with developing the laser.

During those early years, he and Golobic traveled around the country in an old van carrying the laser - which was about the same size as an office copy machine - to do demonstrations for venture capital fund executives and other potential investors. He and other employees often would work late into the night, with their children sleeping under their desks, to develop the laser and fiber-optic catheters used to deliver the laser's energy in short bursts into patients' arteries.

"Lisa (Wells, the company's first employee) and I had already gone home on a Friday night, and we got this frantic call from Bob to do a demonstration at 10:30 at night," Grace said. "I always knew it would be a late night when Bob asked us what kind of pizza we wanted as we worked late into the night to get the laser pulse right."

Those late nights would eventually pay off, but the company first had to overcome numerous hurdles.

Approval took two years

One major issue: Spectranetics didn't have executives with experience in medical devices, which meant they didn't know how to get federal approval for the laser. Company officials had planned to test the laser on patients, but a rival that Spectranetics later acquired beat them to the operating table before they could hire a CEO with extensive medical device experience.

Spectranetics finally sought federal approval for its laser in 1991, hopeful that it would be approved quickly. But Sverdrup died of complications from lung transplant surgery that year as the company awaited the critical OK. The approval took two years because regulators wanted more information about the kinds of patients who would benefit from the laser procedure.

The wait cost the company $10 million, since the company had already geared up for production.

As a result, the company laid off 25 employees and delayed some research projects to preserve cash. Grace left the company for 18 months until Spectranetics could afford to hire him back.

"We were running very low on cash and had taken some big hits, but we knew we could do a lot of good and had faith in the technology," Grace said.

In 1992, Spectranetics went public by selling 2.5 million shares at $13.50 a share. The stock shot up to more than $20 a share in the next few weeks but lost more than half its value as the company waited for approval. It wouldn't hit its initial offering price again for 15 years.

Spectranetics got approval for its laser in February 1993, and Golobic said shortly after that the company could hit $100 million in sales in five years.

Four months later, he died in a mountain-climbing accident near Westcliffe. Although he had stepped aside as president and CEO by then, he remained chairman and spent much of his time as liaison between Spectranetics' engineers and doctors who used the laser. The company "was his baby," said his widow, Rose Ann Golobic.

Merger was a lifesaver

Spectranetics soldiered on, and later in 1993, it merged with its only direct competitor, California-based Advanced Interventional Systems Inc., ending a two-year fight over patents and customers. Without the merger, Childs said, neither company likely would have survived because both were hemorrhaging cash and spending much of their time and resources fighting each other instead of selling lasers and catheters.

Spectranetics was the surviving name in the merger, but its laser was slow to catch on because the company didn't provide enough training for doctors who used the machine, and the company faced several patent lawsuits from competitors over the next decade that were later settled.

By mid-2002, a dissident shareholder from Kansas began collecting votes to replace some board members, winning support from Spectranetics CEO Joseph Largey, CFO Paul Samek and four other executives. The fight led to the board ousting Largey and Samek and brought on a flurry of lawsuits and, eventually, a settlement that cost the company $700,000 - all of which ended up being a "distraction" for the company for seven or eight months, Childs said.

By 2008, Spectranetics seemed to be hitting on all cylinders. The company's stock had hit a 15-year high the previous fall, and it would reach Golobic's goal of $100 million in revenue by the end of the year.

But a new problem was developing: A former employee went to federal regulators with allegations that Spectranetics was illegally marketing its lasers for uses that regulators hadn't approved and illegally testing products on patients without federal approval.

Those allegations, and others, likely triggered a September 2008 raid on the company's headquarters by regulators that eventually cost Spectranetics nearly $14 million in settlements with two federal agencies and stockholders who had filed related lawsuits after Spectranetics' stock plunged.

The company also ousted its then-CEO and several other executives who were indicted.

Fifteen months after the raid, a new CEO, Emile Geisenheimer, settled the charges.

"It was a huge setback, but we worked through it quickly to put it behind us, and I believe it made us a stronger company," said Childs, the CFO, who joined the company in 1991.

'A change in mindset'

In 2011, Spectranetics hired Scott Drake away from Denver-based dialysis giant DaVita to become its CEO, replacing Geisenheimer, who retired.

Shortly after joining the company, Drake said he sat down with senior managers and the company's nonexecutive chairman, John Fletcher, to set what would become the next major goal for Spectranetics: growing its annual revenue to $300 million by 2015.

The company generated nearly $160 million in revenue last year, and once it completes its $230 million acquisition this month of California-based AngioScore Inc., a manufacturer of specialty angioplasty balloons, Spectranetics will have a shot at making the $300 million goal.

The company has not updated its revenue forecast since announcing the AngioScore acquisition, the biggest in its history, but Christopher Pasquale, a stock analyst for JPMorgan, estimated Spectranetics' revenue will grow more than 35 percent to hit $277 million in 2015.

Drake also has implemented a growth strategy that includes winning federal approval to use the company's lasers to clear blocked stents.

Childs said Drake's arrival "marked a change in mindset for Spectranetics; we went from dealing with challenges left and right to playing offense. It lifted the eyes of the entire (management) team to the potential and the opportunity that we have before us."

The company had a brief misstep this year when sales slumped and losses widened after what it called "disruptions" stemming from an expansion of its sales force. That caused the stock to drop about a third from a record $31.56 a share reached in March.

But Brooks West, a senior research analyst for the investment bank PiperJaffray, wrote in a report last month that he expects Spectranetics to resume its double-digit percentage revenue growth rate by the end of the year.

Drake says it is time for the company to set a new revenue goal, and he wouldn't rule out hitting $1 billion in revenue by the end of the decade, or 10 times Golobic's original dream of $100 million.

To hit that goal, Spectranetics needs to complete the AngioScore purchase and win the approval by October to use its laser to clear blocked stents. Together, those will nearly double the size of the markets in which the company competes to nearly $4 billion.

"This is all about saving patients' lives and limbs," Drake said. "Numbers are just a way of measuring that."

Grace said that under Drake, the company has been able to get new products onto the factory floor quicker and with fewer missteps than in the past, which he said has made Spectranetics "a great place to work as an engineer" and attracted several children of longtime employees to join the company.

"Johan (Sverdrup) and Bob (Golobic) were the most humble and incredible people you could ever meet. We were through good and bad times together, and sometimes they would not take a salary so other employees could get paid," Grace said.